The Effects of Personal Data Management on Competition and Welfare

This study examines the impact of consumers’ personal data management on firm competition in the data collection and application markets, as well as on welfare outcomes. Consumers purchase products from differentiated firms in these two markets. Initially, in the data collection market, firms compete to collect consumer data to predict preferences in the data application market, enabling them to offer personalized prices to their targeted customers. Before firms set prices in the data application market, targeted consumers can erase their data at a fixed cost, thereby becoming untargeted. We show that personal data management leads to higher prices, lower firm profits, negative externalities among consumers, and reduced consumer surplus in the data application market. In the data collection market, personal data management intensifies competition and improves consumer surplus. Our analysis further explores extended scenarios of personal data management—including the rights to opt out of data collection, data portability, and data ownership—and reveals that firms’ two-market profits and total consumer surplus change nonmonotonically with consumers’ data rights. Specifically, granting consumers data rights beyond simple data erasure can reverse the effects of erasure alone, benefiting firms while harming consumers. Moreover, data management influences cross-market competition quite differently depending on which market consumers exercise their data rights. Finally, we discuss proactive strategies firms can employ to maintain profitability under personal data laws. This paper was accepted by Dmitri Kuksov, marketing. Funding: J. Cong acknowledges the financial support from National Natural Science Foundation of China (Projects 72473024, 72192845) and support from the Shenzhen Research Institute, City University of Hong Kong. The authors gratefully acknowledge the financial support from the Japan Society for the Promotion of Science (JSPS), KAKENHI [Grants JP19H01483, JP20H05631, JP21H00702, JP21K01452, JP21K18430, JP23K20593, and JP23K25515], Nomura Foundation, the International Joint Research Promotion Program at University of Osaka, and the program of the Joint Usage/Research Center for “Behavioral Economics” at ISER, University of Osaka. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2024.08024 .